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Global stocks and bonds fell on Tuesday as a surprise policy tweak by Japan's central bank rattled investors already worried about the economic fallout of rising interest rates and lifted domestic bond yields to seven-year highs.

The Bank of Japan (BOJ) widened the allowable band for long-term yields to 50 basis points either side of its 0% target, from 25 basis points previously.

European stock markets hit six-week lows, with the German and French benchmark indices falling by as much as 1%, while London's FTSE 100 lost as much as 0.8%.

Japanese 10-year government bond yields surged to their highest since 2014, with euro zone yields following suit. Yields rise when bond prices fall.

"There have got to be a lot of people on holiday saying 'wait this wasn't supposed to happen'," said James Rossiter, head of global macro strategy at TD Securities.

Rossiter pointed to BOJ Governor Haruhiko Kuroda's speech in which he said the policy tweak was "aimed at improving market functions" and was "not an interest rate hike".

"That is not how markets have taken this," said Rossiter, adding that thin liquidity in markets might be playing into the size of the price moves.

Others took the BOJ decision as a sign that the forces that drove the yen to three-decade lows against the U.S. dollar this year may be beginning to turn.

"While there is still a wide gap, the hint that the BOJ is moving incrementally away from ultra-loose policy should be yen positive in the near term," Kerry Craig, JPMorgan Asset Management's global markets strategist, said.

The BOJ has steadily bought billions of dollars' worth of government bonds to keep long-term interest rates low, despite a pickup in inflation, both at home and abroad.

Allowing yields to move in a wider band could lure fresh cash back to Japan and boost the yen, analysts said.

The policy decision caused an immediate spike in the yen with the dollar index dropping 0.80% to 103.95, a six-month low.

This knocked other currencies from recent gains with both the euro and pound falling more than 3.5% against the yen.

In turn, the Nikkei benchmark index slumped 2.71% after trading in positive territory earlier in the day, while U.S. stock futures fell between 0.1-0.2%, suggesting a modestly weaker start to trading later.

Meanwhile, China's reopening to the rest of the world from nearly three years of COVID lockdowns remained a point of focus for investors.

Credit Suisse on Monday upgraded its outlook from neutral to outperform for China's stock markets in the year ahead.

"The whole narrative of China has changed, it's gone from COVID zero that was putting the economy under pressure and there's now an intention to move towards a reopening," Suresh Tantia, Credit Suisse's senior investment strategist.

"And as that happens, we will see an recovery in China's economy and markets."

In the oil market, Brent crude rose 0.8% to $80.41 per barrel, while U.S. crude rose 1.1% to $75.98.

Spot gold benefited from the weakness in the dollar, rising 1% to around $1,805 per ounce. [GOL/]